On 1992, a balance scorecard method was founded by Kaplan and Norton’s.
What is it
A Balanced Scorecard defines what management means by “performance” and measures whether management is achieving desired results. The Balanced Scorecard translates Mission and Vision Statements into a comprehensive set of objectives and performance measures that can be quantified and appraised. These measures typically include the following categories of performance:
- Financial performance (revenues, earnings, return on capital, cash flow)
- Customer value performance (market share, customer satisfaction measures, customer loyalty)
- Internal business process performance (productivity rates, quality measures, timeliness)
- Innovation performance (percent of revenue from new products, employee suggestions, rate of improvement index)
- Employee performance (morale, knowledge, turnover, use of best demonstrated practices)
Balance scorecard is a performance management tool that aim is to help managers to track activities and keep control upon it.
Instead of focusing on the financial performance measurement balance scorecard on both financial and non-finncial objectives. the balanced scorecard method translates an organisation’s strategy into performance objectives, measures, targets and initiatives.
Now a day
The Balance on the Balanced Scorecard
A Critical Analysis of Some of Its Assumptions
Many people think that financial measures are not an accurate measurement of the performance. It is only focus on the past data instead of future objectives. Accounting figure is not helpful in the elements that lead to predict good or poor future results. It is only documenting the historical data.
The first problem with accounting ﬁgures is that the performance measures of accounting systems ignore the ﬁnancial value of a company’s intangible assets such as research in progress, human resources and the goodwill as well as the bad-will which the company has built. The problem may even be aggravated if the company is in a situation in which it feels forced to pursue short-term ﬁnancial results rather than the organization’s long-term goals. for instance, shows that because new investments are detrimental to the short-term return on investment, owing to asset valuation and depreciation policy, managers may be reluctant to make such investments even if the investments are in the ﬁnancial interest of the company. Furthermore, managers may refuse to invest in growth and innovation potential so that they can present acceptable short-term results. While possibly improving short-term proﬁtability, such actions may lead to low efﬁciency and loss of customer loyalty and satisfaction, which may render the company vulnerable to competitor attacks. Such issues imply that the accounting systems are an insufﬁcient decision-making and assessment tool. In order to reduce the problem involved, strategic measures are required which indicate the company’s future earnings potential.
The second problem is focused on strategy implementation, which causes. problems in many ﬁrms. the risk being that the strategic plan remains remote from the company’s day-to-day actions. there may be a gap between the strategy expressed in the activities planned and the strategy expressed in the pattern of actions actually undertaken. Reducing this gap requires appropriate tools: change management, organizational learning and staff-controlled processes of change are probably necessary. Processes and actions can not take place in a vacuum, however. At various levels, relevant strategic measures have to be introduced which can control and coordinate staff decisions and actions at these levels. The aggregate ﬁnancial measures of the accounting system are not sufﬁcient to ensure goal congruence between staff decisions and actions. These two interrelated problems have led to the development of a large number of strategic measuring tools which involve not only ﬁnancial but also non-ﬁnancial measures. Balance scorecard is one of many measures that integrate financial and non-financial strategic measures.
Using the balance scorecard as a strategic management system
Kaplan and Norton’s came up with a revolutionized concept that changed the people perspectives for the objectives measurements. Without focusing on the financial performance only, many managers became much aware of their companies real performance. Balance scorecard added another three standards to measure the performance other than financial measurement to be complement to it and to help managers to follow up the financial results and in the same time supervise the improvement in capabilities and acquirement of required assets for future growth. The reasons of that is mangers can now forecast the future financial performance rather than just reporting historical data which facilitate for managers to link today’s action with tomorrow objectives.
The importance of Balance scorecard came from its ability to link long-term strategic objectives with sort-terms actions by four management’s process. These processes are translating the vision, communicating and linking, business planning, feedback and learning.
- In translating vision, it is important that people to tie their performance to the vision statement. Since the vision, statement is difficult to be understood by the originations members in performance stage, translating vision into sets of goals and measurements describe the long-term driver of success to be easily observed by the all organization members.
Clarify the vision is important to ensure that employees’ day-to-day activities are contributing to attain the company’s strategy. So that, it is important to close the gap between the mission statement and employee knowledge of how to meet this mission in his day to day activity. In addition, gaining consensus among managers before translate the vision to the targeted people is important. To avoid misunderstanding of vision and deliver targeted value proposition, it is important to highlight the gap between employees’ skills and information system.
- In communicating and linking process, the aim is to communicate the strategy from upper level in the organization to the lower level to ensure all departments and individual are realizing it and their objectives are linked with the company overall strategy. When company involve several layers of managers to develop the balance scorecard this will enhance the deep understanding among them. For example, an organization that top managers are involving only in forming the financial and customers objectives and then mobilize the information and talents to the middle managers to form the internal business process and learning and growth objectives will achieve a stronger commitment for these objectives. Balance scorecard is trying to tell everyone what is the organization is trying to achieve for its stakeholders.
To align stuffs activities with the organization overall strategy three activities are conducted. These activities are:
Communicating and educating
To perform the strategy, it is required first to communicate it to those who will perform it to keep them committed to the scorecard. The organization should conduct a communication programs to explain the strategy and the required objectives and balance scorecard measures to meet this strategy. Also, allow the employees to recommend how the target will be achieved. On other words, employees should communicate measures from down to upper level of the organization in the way that give feedback of how is the strategy working.
The organization’s overall strategy should be explained into objectives and measures to facilitate it for employees with in organization. For example, an organization can come up with three levels of objectives. These levels are corporate objective, business objective and individual objective. First level has corporate objective measures and targets. Second level is translate the corporate objective into the business unit. Third level is about the individual objectives that is consistent with both corporate and business unit objective and give the employee to se individual objectives, targets and measurements.
Linking rewards to performance measures
The compensation system should be linked to the balance scorecard system. For example, compensate employees based on financial and non-financial indicators. Orgniztion should have 60% of bonuses based on the financial indicator such as cash flow and profitability while other 40% bonus based on non-financial indicator such as customer satisfaction and employees satisfaction.
- Many companies suffered from the huge number of initiatives and change programs that are difficult to be all integrated. In business planning process, ambitious Balance scorecard used as a basis to allocate resources and setting priorities to accept only initiatives that help them to perform long-term strategic objectives.
Usually, resources allocation and budgeting set by financial departments in organizations that only focus on the financial targets and ignore other targets. Managers is setting their budgets and discuss the actual performance against budget which ignore the non-financial measurements and objectives. To link financial budgets with the strategic objectives, some companies set a process where employees chose measures from all scorecard different perspectives and put target for each of them. After that, the required actions that drive to each target will be determined and the measures that will apply for those drivers will be identified. Finally, milestones that will identify the progress toward the strategic objective will be selected. By doing that, the company can ensure that their budget is support their strategy.
Aligning strategic initiatives, Allocating resources and Establishing milestone
After clarify the strategic objectives and the critical drivers to attain these objectives, a framework will be created to manage an organization various initiatives. The strategic initiatives should be recognized and allocate the necessary resources to those initiatives. Milestone to measure the progress in achieving the strategic goal should be established. Established milestone is managers thinking about the time and the level of their current program affects.
- Learning and feedback offer the company the opportunity for strategic learning. By reviewing the short-term results and feedbacks, the company will be able to evaluate the strategy based on recent performance to conduct corrective actions that reflect real time learning. It offer the opportunity to conduct continues test.
Articulating the shared vision
It means to define accurately and in operational terms the required result that the people in the company is looking to achieve. The aim of that is to link individual efforts to the business objectives.
Supply strategic feedback
The enterprise strategy is nothing rather than a set of hypotheses about cause and affect relationships. By establishing goals in business-planning process, it will be test, validate and modify the relationship between change in performance driver and the related change in one or more goals. Also, it is examine the strength of the linkages among measures in different perspective.
Facilitating strategic review and learning
Use the periodic events to review balance scorecard cause and effect relationship, performance driver and objectives to evaluate the performance of the business unit and the validity of the strategy. Sometime, these quantitative measures between strategic measures and balance scorecard end up with define the need to change the strategy.
The balance scorecard offer the framework and the concentration on the crucial management processes such as departmental and individual goal setting, business planning, capital allocations, strategic initiatives and feedback and learning. Usually, these processes are not properly organized without balance scorecard and only conducted to perform sort-term goals. The aim of balance scorecard is to help day-to-day employees’ activities in all organization departments to satisfy mission and vision statement.
There are many benefits and challenges to the balanced scorecard. The primary benefit is that it helps organizations translate strategy into action. By defining and communicating performance metrics related to the overall strategy of the company, the balanced scorecard brings the strategy to life. It also enables employees at all levels of the organization to focus on important business drivers. The main challenge of this system is that it can be difficult and time-consuming to implement. Kaplan and Norton originally estimated that it would take an organization a little more than two years to fully implement the system throughout the organization. Some organizations implement it quicker, for some it takes longer. The bottom line is that the balanced scorecard requires a sustained, long-term commitment at all levels in the organization for it to be effective.
Table 1. Comparison of Balanced Scorecards in the Private and Public Sectors (source Nicholas J. Mathys, 2006)
||Profit; market share growth; innovation; creativity
||Cost reduction; efficiency; accountability to the public
|Efficiency concerns of clients
||taxpayers; legislators; inspectors
|Who defines budget priorities
||Leadership; legislators; funding agencies
|Key success factors
||Uniqueness; advanced technology
||Sameness; economies of scale; standardized technology
Conclusion and recommendation